Worst weekly fall in 3 months for Indian markets

Sat, 9 Nov RoundUp

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Barring the US and Germany, major global stock markets ended the week in the red. The US stock markets gained 1.4% over the week on account of a better than expected jobs report. A positive jobs report has left investors wondering if it could lead to a scale back of the bond-buying program before the end of the year. However, the statistics on consumer sentiment index was not so positive as preliminary November consumer sentiment index declined to 72.0 from 73.2 in the final October report.

European markets also declined as France had to face a sovereign rating downgrade. Further, the positive data on the US economy triggered concerns of an earlier pull back of stimulus. Among the major European stock markets, those in the UK and France were down by 0.3% and 0.9% respectively over the week. However, the stock markets in Germany gained 0.5% over the week. For Germany, exports rose for a second straight month and the trade surplus beat forecasts in September.

It was a lackluster week for Asian stock markets. The turnaround that the markets had witnessed earlier, following the delay tapering of monetary stimulus program, was offset by weak corporate results in the region. The Asian markets remain vulnerable to possibility of US central bank scaling back its monetary stimulus. The stock markets in China lost 2% over the week.This was despite strong growth in Chinese exports last month. The stock markets in Japan were down 0.8% over the week due to the yen’s appreciation against other major currencies.

The Indian stock markets were the second biggest losers during the weekand faced the worst week in 3 months asprofit taking hit the marketsafter the index hit record high earlier.The BSE-Sensex closed the week with a loss of 2.5%.

Key world markets during the week

Source: Yahoo Finance

Most of the sectoral indices ended the week in the red with stocks in the banking (down 6.2%) and consumer durables (down 6.9%) space witnessing maximum losses. However, stocks in the healthcare (up 0.4%) and Information Technology (up 1.5%) sectors were the biggest gainers.

BSE indices during the week

Source: BSE

Now let us discuss some of the economic developments of the week gone by.

The Government has sanctioned around Rs 178 bn cash subsidy to fuel retailers to compensate them for losses on the sale of sensitive petroleum products for the quarter ending September 2013. The three state run oil marketing companies - Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOC) had lost around Rs 353 bn in revenues on selling diesel, cooking gas (LPG) and kerosene at government controlled rates in the July-September quarter. Hence, the subsidy will take care of around half of the under recoveries during the quarter. Around Rs 167 bn of the total under recoveries will be compensated for by upstream oil and gas producers like ONGC and GAIL (India) Ltd. Of the Rs 178 bn sanctioned, IOC would get just over Rs 91.7 bn, BPCL would get Rs 44.4 bn and the remaining amount of Rs 41.5 bn will be received by HPCL. As per the daily, the state run OMCs are now left with around Rs 31 bn of unmet losses.

Foreign Direct Investment (FDI) into the country's services sector has declined by 47.5% year on year (YoY) during the April-August period of 2013. The fall is mainly due to the declined outsourcing business of India on the back of the various restrictions put by developed economies. It is important to note here that Indian services sector represents around 60% share in the country's GDP. During 2012-13, foreign investment in the segment fell by 7 % YoY. The statistics reflects the need to take more steps to improve the business environment in the country.

Movers and shakers during the week

Company	01-Nov-13	08-Nov-13	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Torrent Power Ltd	83	98	18.9%	198/67
Aurobindo Pharma	230	260	13.3%	265/127
Muthoot Finance	106	118	10.7%	246/74
Gujarat State Petronet	56	61	9.8%	82/47
Tech Mahindra	1,526	1,674	9.7%	1686/865
Top losers during the week (BSE-A Group)
Shriram Transport Finance	646	564	-12.6%	842/465
United Breweries	892	783	-12.2%	1023/581
Bank of Baroda	672	601	-10.5%	900/429
Titan Industries	262	234	-10.4%	314/200
PNB	570	522	-8.5%	922/402

Source: Equitymaster

As per a leading financial daily, the rating agency, Standard & Poor's has reaffirmed sovereign credit rating on India citing a negative outlook for the long-term. The company has affirmed 'BBB-'long term /'A-3' short term sovereign credit rating on India. The rating agency has turned confident about the institutional strengths of India and high international reserves backed by lowering external debt. However, the weaknesses still remain. Lack of adequate structural reforms, subdued growth and uncomfortable government debt levels are the concerns cited by the rating agency. The worries have stemmed from the fact that the significant slowdown in real growth has complicated government's debt dynamics and its ability to undertake reformist measures. Therefore, the overall outlook remains negative and the agency might lower the rating to speculative grade from the current investment grade next year. And if the new government is found incapable of revival of India's low GDP growth, the downgrade stands imminent.

Now let us look at some of the corporate earnings which were released this week.

The country's second largest public sector bank, Punjab National Bank has declared a disappointing earnings performance for second quarter of the financial year 2013-14 (2QFY14). While the net interest income increased by 10.1% YoY for the quarter, net profits declined by 52.6% YoY. For first half (1HFY14), profits declined by 23% YoY. Net interest income (NII) at Rs 402 bn grew by 10.1% YoY in 2QFY14, on the back of modest 6.5% YoY growth in advances. Profitability for the quarter declined by a higher percentage on account of the significant rise in provisions. Other income too declined by 0.9% YoY in 2QFY14. Gross NPAs (non-performing assets) stood on the higher side at 5.1% levels. Net NPA came in higher at 3.07% in 2QFY14 from 2.69% in 2QFY13.On a sequential basis, the NPAs moved up for the quarter. Capital adequacy ratio stood at 11.62% at the end of 2QFY14 as per Basel III norms.

Power equipment manufacturer Bharat Heavy Electricals Ltd (BHEL) announced results for the quarter ended September 2013. The company's revenues and profits declined by 15% YoY and 64% YoY respectively. The company's operating margins dropped to 4.6% from 18% in 2QFY13, with the operating profits declining by 78% YoY. The key reason behind the same was the operating performance of the 'industry' segment which reported PBIT margin of negative 0.2% as compared to 21.3% margin last year. Share of revenues from this business stood at 19% of total, which is similar to that of last year. As for the 'power' segment, revenues declined by 15% YoY while margins came in at 14.5% as compared to 19.8% in 2QFY13. Had it not been for the 281% YoY increase in other income, the profit decline would have been sharper. During 1HFY14, revenues and profits declined by 19% YoY and 58% YoY respectively.

Ashok Leyland Ltd has announced its standalone financial results for the second quarter of the financial year 2013-14 (2QFY14). During the quarter, the company's net sales (including other operating income) were lower by 23.2% on a year-on-year (YoY) basis. The main reason for the decline in the topline was on account of the slump in commercial vehicle demand. Operating profits plunged sharply by 83.2% YoY. Operating margins contracted from 10.1% in 2QFY13 to 2.2% in 2QFY14. While depreciation expenses decreased by 8.5% YoY, finance costs increased by 20% YoY. The company reported an exceptional gain of Rs 437.6 m on account of sale of certain long term investments. At the bottomline level, the company reported net loss of Rs 250.5 m during the quarter as against net profit of Rs 1,426 m in 2QFY13.

Now let us move on to some more news from the corporate world.

Power Grid Corporation of India Ltd (PGCIL)'s follow-on public offer (FPO) has received an approval from the cabinet. The offer includes raising of fresh equity of 13% and a divestment of 4% stake by the government. PGCIL will issue fresh 601.8 m shares through the offer. The government will sell 185 m shares under the issue. Although the FPO price is not fixed yet, at the current price of about Rs 90-95; it is expected to raise close to Rs 73 bn. PGCIL will be using the FPO amount for its capital expenditure plan for the next two years while the government will use its share of proceeds to meet its divestment target. This would be the second follow-on offer from PGCIL, which sold a 10% stake in November 2010 at a price of Rs 90 per share.

According to a leading business daily; Dr. Reddy's Laboratories (DRL) is planning to launch its generic drug-Fondaparinux sodium injection in Canada as well as two other emerging markets. Fondaparinux is used in the prevention as well as treatment of deep vein thrombosis. It is sold under the brand name Arixtra by GlaxoSmithKline. According to an Australian pharmaceutical company Alchemia Ltd, which has marketing tie up with the company; Dr Reddy's is likely to file for its approval in the aforesaid regions. As per Alchemia's annual report of 2013, the net sales of Fondaparinux by Dr Reddy's were a total of US$ 45.3 m. Dr Reddy's has already launched Fondaparinux in India in April 2013.

The telecom service provider, Bharti Airtel is all set to acquire Warid Group's Congo operations and strengthen its foothold in Africa. This is the second-in-line acquisition post the acquisition of Warid's Uganda operations early this year. With around 2.6 m customers, this latest acquisition is expected to make Airtel the largest mobile operator in Congo-Brazzaville belt. Currently, Bharti Airtel is the second largest operator in the country with over 1.6 m customers and Warid is the third largest with around 1 m customers. Combining the strengths of Airtel and Warid, this deal is expected to benefit customers in the form of affordable tariffs, superior 2G or 3G network, affordable voice and data services and superior customer care. Moreover, this will also enable Bharti Airtel to strengthen its market position and build a world-class network for the overseas customers.

Going ahead, comments from Federal Reserve officials regarding the stimulus plan will be key factor in determining the movements in the global stock markets. Besides, the corporate earnings will continue to drive Indian markets. Having said that, we believe that investors should not depend upon specific events to make their investment decisions. The focus will have to be on studying companies and investing in those that have good business models, sound management and ultimately available at reasonable valuations.